In a recent issue, the Barron’s Tech column claimed that The Internet of Things Is a Dead End for Now and the formerly promising buzz-phrase has so far become nothing more than a:
jumble of electronic devices that don’t really connect anything. They’re just dead ends.
The problem according to the author?:
They are appendages to smartphones, sold like accessories, diminishing the payoff of owning them. They don’t open up whole worlds, the way the Internet did. They siphon customers into ecosystems, the term popular today to describe the trap laid by Fitbit and Apple and Google to mine their customers for recurring revenue.
So what is being built?:
literally and figuratively, Apple and Google and the rest are building a rat’s nest of complexity
Those are some interesting observations resulting in a pretty hot take. Especially when you recall how much money is being poured in by some very big payers. Trying to offset PC weakness, Intel (INTC) paid about $17 billion to buy Altera last year, and in the second sentence of the Q1 earnings press release highlighted the “strength” IoT sales at $651 million in the quarter, growing 4% sequentially and 22% year over year. Possibly dding to Barron’s argument, you may not want to hold your breath waiting for IoT growing just over 20% yoy, (annualizing at about $2.5 billion) to make a dent in a company like INTC’s $57 billion in annual sales.
But maybe INTC is not the play, as Quartz reports this morning:
Most of the innovation on the so-called Internet of Things is locked up in patents held by the companies that make the innards of sensors, routers, and other devices, according to a study by LexInnova
Qualcomm (QCOM) is the lead patent holder, not far above INTC, and as Quartz says “not all patents are created equal”, as QCOM’s portfolio is by far of the best quality:
While IoT is one of the buzziest of tech buzzwords, there seems to be some debate as to when and how connected home, cars and wearables will be a big business. For now IoT related sales were likely less than 5% of INTC and QCOM’s sales in the last year. But with PC sales falling off a cliff, and smartphone sales growth flattening, both companies will continue to push into new technologies that offer the potential for new high growth product cycles.
Before we get too dismissive, remember that many still think this is the next massive wave in technology. Fo instance, this from a McKinsey report titled Internet of Things: Opportunities and challenges for semiconductor companies:
The McKinsey Global Institute recently estimated that the Internet of Things could generate $4 trillion to $11 trillion in value globally in 2025. These large numbers reflect the IoT’s transformational potential in both consumer and business-to-business applications. Value creation will stem from the hardware, software, services, and integration activities provided by the technology companies that enable the Internet of Things.
Analysts also estimate that the current Internet of Things installed base—the number of connected devices—is in the range of 7 billion to 10 billion. This is expected to increase by about 15 to 20 percent annually over the next few years, reaching 26 billion to 30 billion by 2020.
So bringing this back to the big boys like QCOM. Given their massive cash balance (37% of their market cap in cash, 23% net of debt) I would expect the company to be make acquisitions in this space. That list probably includes, Silicon Labs (SLAB), Microchip (MCHP) or NXP (NXPI).
I am not a fan of buying stocks simply on the potential for a take-over, but a stock like SLAB has a mere $2 billion market cap and is trading 2.9x expected 2016 sales of $680 million. It’s easy to see possible dollar signs when you consider INTC paid 10x ALTR’s 2015 sales in the takeover.